In the mid-17th century, the average Chinese farmer knew the exact size of his market. China had been cultivating staples like rice and buckwheat for thousands of years, honing planting, harvesting, and distribution down to a precise science. So when European traders showed up with an exotic new tuber from South America they called the “potato,” many established farmers probably expected that the new crop would take over some fraction of the existing market for rice.

Those farmers would have been dead wrong. China’s rice supply was constrained by the country’s relatively limited amount of fresh water, and the Chinese population was hungry—literally and figuratively—for more food than it could provide. Since potatoes use 30% less water than rice, they could be grown in arid highlands previously thought unsuitable for cultivation. As journalist Charles C. Mann describes in his 2011 book 1493: Uncovering the New World Columbus Created, millions of people migrated up mountainsides, clearing forests to make way for potatoes. The influx of additional food helped drive a sudden population boom; some scholars believe China’s population as much as doubled in the years between the introduction of the potato and the end of the 18th century.

The history of Chinese potatoes illustrates an important characteristic of innovative products and the companies that create them: the majority of their growth comes not from stealing share from existing markets, but from unlocking new ones. Companies like Uber, Snap, and Airbnb have succeeded by doing the equivalent of turning forested hillsides into productive potato farmland, using technology to tap into new markets incumbents didn’t even know were there.

Unfortunately, when determining the size of a potential investment opportunity, too many investors still look at the size of the metaphorical rice paddy. Though they’re often discussed in investment meetings, indicators like total addressable market (TAM), which measures the size of a target market that already exists today, aren’t a great predictor of the full potential of an innovative company.

In existing markets, incumbents have established sales channels, high brand recognition, and massive scale that enables price advantages. Today’s most innovative companies actually wreak havoc on those existing markets, deflating prices and very often revenues. Their real growth is to be found elsewhere—in entirely new, wide-open markets that they unlock. These upstart companies rapidly acquire dominant or even monopolistic market share in their new spaces, achieving pricing power and other competitive advantages even before they have competitors. If investors want to spot the next Google or Facebook, they need to look not at markets that already exist, but the new markets that a product or service has the potential to create.

A Pattern of New Market Creation—and Domination

Take Airbnb, for instance. 10 years ago, when the founders were raising their seed round, it looked like a niche service with little potential to scale. It was true some people were seeking temporary housing on sites like Craigslist andCouchsurfing.com, but they were mostly broke college students and twenty-somethings—a tiny and not very profitable sliver of the hospitality market. There was little indication that the service would appeal to a wider market. Even Couchsurfing.com featured only 630,000 listings worldwide, according to Airbnb’s own pitch deck. Why would anyone opt to stay in a stranger’s home if they could afford a nice, comfortable private hotel room?

What investors who passed on the opportunity didn’t see was that Airbnb was poised to unlock new markets in two key ways common to most successful high-growth companies today.

Enabling new purchasers. These companies bring new people into the market. In Airbnb’s case, the key factor was trust—that elusive quality that’s so key to the sharing economy. By tying users’ Facebook profiles to their Airbnb accounts and (eventually) providing professional-quality photos of each room, Airbnb fostered trust within its community of guests and hosts, driving rapid adoption of the service by many consumers who never would have trusted couchsurfing services. This development was key in Airbnb’s expansion outside its initial young and price-conscious target market. In a report released earlier this year, Airbnb said that while Millennials still account for the majority of guests on Airbnb, and that people over 65 are the fastest-growing host demographic, opening their homes to strangers they only knew through a Facebook profile.

Creating new purchasing occasions. Alternatively, new markets can be unlocked when companies create new purchasing occasions, so that people go from buying a product or service two times a year, for instance, to buying it monthly. Airbnb’s convenient mobile app, efficient search algorithm, and secure online payment process reduced friction that had been inherent in the process of finding and booking temporary housing. As the company expanded, it reorganized supply in the broader hospitality market by giving people a way to monetize their unused spare rooms and empty houses as rentable spaces. These changes—among many, many others—increased opportunities for both hosts and guests to participate in transactions.

The combined impact of these drivers and the new market they unlocked is clear. As of August 2017, the total number of rooms available on Airbnb hit 4 million—more than the top five hotel groups in the world combined. Pore over other tech success stories, and you’ll see this pattern of unlocking new markets, then capturing dominant market share repeated again and again:

The iPhone

Apple’s invention of the iPhone in 2007 didn’t just steal market share in the cell phone industry—it unlocked a new market for a new product. Technically, “smartphones” had been around since the 1990s, but they were staid, corporate products like the Blackberry, mostly used by business professionals for work. Similar to the market for couchsurfing, the market for smartphones appeared to be vanishingly small: in 2007, only 17 million smartphones were sold worldwide out of 1.15 billion mobile devices.

However, the iPhone’s user-friendly design and mainstream appeal unlocked a new market of smartphone users who used phones to communicate with friends, play games, and listen to music. Three years later, year-over-year growth in smartphone unit shipments was close to 80%. By 2016 smartphone sales totaled 1.5 billion units compared to only 396 million for feature phones. Though Apple has never had a monopoly position in the smartphone market—its share has been around 15-25% for almost a decade—its reputation for innovation and position at the high end of the market has earned it a disproportionately large share of smartphone profits.

AdWords

When Google AdWords launched in 2000, only a little over half of US households had computers, according to a US Census report; most local businesses advertised in the yellow pages. However, AdWords’ low price, convenience, and trackability created new consuming occasions for local advertising, unlocking a new market that quickly ballooned. The entire US yellow pages industry took in only $13 billion in ad revenue in 2000; by 2010 AdWords and Google’s ad network AdSense were raking in almost double that much—$28 billion a year. Google still retains its dominant market share today: it will take 77.8% of all US search ad revenuesin 2017, bolstered by its dominance in mobile search over competitors like Microsoft, Amazon, and Yelp.

Skype

International phone calls used to be expensive and rare, but in 2003 Skype’s free VoIP service changed all that. Suddenly, it was possible to call friends and family in another country for a casual chat without paying for long distance. By 2011, cross-border Skype traffic was growing 48% year-over-year, almost four times the long-run industry average of 13%. By 2013, one-third of all international voice traffic was over Skype.

Why Old Markets Deflate

The rapid expansion of the new market is only one part of the picture. In most cases, the entry of innovative new players also triggers price deflation in the original market, as incumbents scramble to keep up with their cheap new competition. This loss of revenue isn’t immediately countered by revenue growth in the new market, as many new apps don’t generate steady revenue at first, even when they have millions of daily active users. Even as user bases grow, revenues across the industry shrink.

For example, in 1999, four years before the advent of Skype, US telcos saw more than $20 billion in revenue from international calls made from the US, according to the FCC. In 2014, by contrast, international call providers including VoIP services billed US customers only $3.7 billion. That’s more than an 80% decrease. In other words, TAM is a bad estimate of market size in two directions: it overestimates revenues as the same time as it underestimates potential user base.

Use Your Imagination

TAM presumes that markets are in relative stasis, and that markets in the future will look more or less like markets that come before. But we know now that change, when it comes, is neither incremental nor small. Why do we keep insisting otherwise at pitch meetings?

Great entrepreneurs are driven by their conviction of the way things should be. They identify real problems in the world and build companies to solve them, changing the world—or at least a small corner of it—in the process. In a lot of ways TAM is the opposite of this approach. It only deals with the way things are now, as if that were how they were always going to be. In short, it’s a massive failure of imagination. In order to harness the full power of latent demand, investors need to grow beyond that failure and learn to think like entrepreneurs, envisioning the world as it could be.